by Michelle Maton, CFP® & Rob Baner, CPA
It is the biggest tax overall in nearly a generation. The Tax Cuts and Jobs Act of 2017 (TCJA) was enacted in December of 2017 and its reverberations will be felt for years to come. Though much has changed under this new tax reform, many tax savings strategies remain relevant.
Your 2018 tax returns promise to look very different from those you filed in 2017. Personal exemptions no longer apply. The new law makes itemized deductions very limited for most taxpayers. In addition, the standard deduction will be higher for most people; it has doubled to $24,000 for those married filing jointly, $18,000 for heads of household, and $12,000 for single filers.
While the TCJA’s changes are sweeping, many of its provisions are effectively the same. The good news is there remain a number of approaches we can take to minimize the taxes you will have to pay. Here are a few examples of tax reduction strategies that are still available.
Qualified Charitable Distributions (QCDs)
Because of a higher standard deduction in the new tax law, this strategy for reducing your taxes is becoming far more advantageous than in past years. If you are at least 70 ½ years of age and have an Individual Retirement Account (IRA), one tactic for saving on your taxes is to make a Qualified Charitable Distribution. The funds (up to $100,000) can go from your IRA directly to your chosen charity—without being treated as taxable income. That’s right…you are never taxed on the money.
For example, a taxpayer who is 70 ½ years of age is required to make a minimum distribution (RMD) of $25,000 from their IRA. The taxpayer also wants to make a $25,000 donation to a charitable organization. By moving the $25,000 directly from their IRA to the charity rather than writing a check to the charity from their checking account, they can satisfy their required minimum distribution (RMD) requirement and reduce their income by that same amount.
Bunching Charitable Gifts
Along the same lines, for high net worth individuals who are charitably inclined, “bunching” is another means of increasing their total deductions. This tax reduction strategy involves grouping tax-deductible charitable contributions that you would normally make over multiple years into a single tax year. Moreover, the new tax code raises the limit on charitable contributions of cash from 50% to 60% of your adjusted gross income.
For example, someone normally gives $2500 to a charitable cause every year. Now, instead they may give $5000 in the current year and nothing the following year to increase their deduction. Incidentally, under certain conditions, the same bunching strategy might be applicable to your medical expenses. There is normally less discretion for the timing of medical expenses, so be sure to talk with your TPC advisor about this strategy and all others contained in this blog.*
Retirement Plan Contributions
Maximizing your contributions to 401K, IRA, and other similar retirement plans remains an effective tax-favored savings strategy under the new tax law.
Donating Appreciated Stock to Charity
When you donate stock rather than cash, you get the appreciated value of the donation as a deduction. In addition, you are not required to pay taxes on the capital gains. Imagine you buy 10 shares of stock at $10 per share, and your $100 investment grows to a value of $1000. Your donation would be based upon the fair market value of the appreciated stock on the day it is donated.
Accordingly, your stock donation would be $1,000, not $100. On the other hand, if you sold the stock and pocketed the proceeds, you would be responsible for a taxable capital gain on the $900. This makes donating stock an attractive tax-saving option.
529 College Savings Plans
If you are a parent or a grandparent and wish to assist a family member with college expenses or help pay for college tuition, some states allow a deduction for such contributions through 529 Plans. In addition, the earnings on 529 accounts grow tax-free if subsequent distributions are used for qualified education expenses. In 2018, deposits to a 529 plan (up to $15,000 per individual per year and $30,000 for married couples filing jointly) qualify for the annual gift tax exclusion.
Health Savings Accounts (HSA)
In many ways, HSAs are like medical IRAs. If you are covered by a high-deductible health insurance plan, consider contributing to a HSA. You can contribute tax-deductible funds into it (up to the limits), and withdraw the money tax-free for qualified medical expenses. Additionally, the earnings on HSA accounts grow tax-free.
Bear in mind that this is by no means an exhaustive list of tax-saving strategies. Numerous other tax credits and deductions may apply to you depending on your circumstances. There are student loan interest deductions, educational credits, dependent care credits for those with young children, and child tax credits among many others. Finally, remember to keep all supporting documentation for your charitable giving so you can make all of the deductions you are entitled to on your tax return.
* This article is provided for informational purposes only and should not be construed as tax or legal advice. Consult with your TPC advisor or tax specialist for guidance and planning that is specific to your individual financial situation.
The Planning Center is a fee-only financial planning and wealth management firm. Michelle Maton, CFP® is a Partner and Senior Financial Planner and Rob Baner is a CPA, in the Chicago and Quad City offices respectively. Email her at firstname.lastname@example.org and him at email@example.com.